“More compelling!” No, “Less Compelling!” It’s the battle of the data as the Federal Reserve heads off to its Jackson Hole retreat to think about interest rates
If you’re old enough to remember, today’s comments from the Federal Reserve at the annual retreat conducted by the Kansas City Fed in Jackson Hole will remind you of those Miller Lite adds where one gang of retired athletes yelled “More flavor” at another group that yelled “Less filling.”
Only today it’s Fed members yelling “More compelling” and “Less compelling” at each other over the potential for an initial interest rate increase when the central bank’s Open Market Committee meets on September 17. On Wednesday New York Fed President William Dudley helped push the market toward higher by saying that recent market turbulence had made the case for a September interest rate increase “less compelling.” Today Fed vice chairman Stanley Fisch said reports on the U.S. economy had been “impressive” and “the economy is returning to normal.”
And then Fischer, in an interview with CNBC balanced between the two positions:
“I think it’s early to tell, the change in the circumstances which began with the Chinese devaluation is relatively new and we’re still watching how it unfolds. I wouldn’t want to go ahead and decide right now what the case is, more compelling, less compelling.” (Fischer will make an official appearance tomorrow on a panel at the conference.)
No wonder that U.S. stocks are meandering aimlessly with a slight downward bias today
Would you want to be ahead of potential news on the Fed’s thinking tomorrow—even if the likelihood of any significant news is relatively small?
Complicating the situation are comments from James Bullard, President of the St. Louis Fed, suggesting that the central bank could pass on a September decision but give itself the option of moving in October by adding a press conference to the agenda that day. Many traders had decided that the Federal Reserve wouldn’t act in October because the central bank doesn’t like to move on interest rates at meetings without a scheduled press conference that would let it explain its thinking.
Odds of a decision at the October 28 meeting had climbed to 47% from 40% on Thursday. Meanwhile odds of a September increase have recovered to 38% after having dropped to 28% after the big down day in Shanghai on Monday.
The next important data point will be the jobs number for August scheduled to be reported on Friday, September 4. A strong read on the creation of new jobs—200,000 or more—would raise the odds for a September increase. Economists are currently forecasting a 220,000 gain.
To me the idea of adding a press conference and putting October on the schedule suggests a way for the Fed to split the difference between moving in September without convincing data and seeming indecisive by waiting until December.
Meanwhile, as of the close today, the Standard & Poor’s 500 stock index was ahead 0.06% 0.06% and the Dow Jones Industrial Average was off 0.07%. (By the way, the photo today is of the Andes in Chile. I didn’t have a photo of the Tetons.)
U.S. GDP growth pops to 3.6% in today’s second estimate, but that’s not as meaningful for a Fed taper as it seems
I’m starting to long for some conclusive economic news—even if it is bad economic news.
Today’s release of revised third quarter GDP growth is frustratingly inconclusive—if you’re looking for, as the market is, a strong trend that might indicate which way the Fed will jump on the taper/no taper decision at its December 18 meeting.
The headline number shows a very strong economy. The revised numbers say that third quarter GDP growth came in at 3.6%. That’s a big jump from the 2.8% in the first estimate of third quarter GDP growth and a significant increase from the 2.5% growth rate in the second quarter
If we could take these numbers at face value—and, more importantly, if we were convinced that the Federal Reserve would take these numbers at face value—then I think we’d be looking at a strong argument for believing that the Fed would start to reduce its $85 billion in monthly asset purchases with the December 18 meeting.
But we can’t take these numbers at face value—and I’m certain that the Fed won’t. The big increase in revised third quarter growth doesn’t show an acceleration in the economy’s growth rate. Instead the jump from first to second estimate is due to a big increase in inventories. Growth in inventories, I’d point out, is only a good thing if those inventories get sold. If they don’t, if goods sit on warehouse shelves, inventories become a big negative for economic growth in the next quarter.
Real final sales, a number that excludes inventories, actually got revised down in today’s estimates to 1.9%. That’s a drop from 2% growth in the first estimate for third quarter GDP and is down from a 2.1% growth rate in the second quarter.
Personal consumption spending also got revised downward to 1.4% from 1.5% today, supporting the slight downward trend in real final sales. Personal consumption spending, what you and I call consumer spending, increased by 1.8% in the second quarter so today’s downward revision shows an even bigger slowing in consumer spending than the first estimate did.
Given the inconclusive nature of today’s GDP numbers, I think we’re set up to have the financial markets react relatively strongly to tomorrow’s jobs numbers for November. The consensus of economists surveyed by Briefing.com calls for the economy to have added 185,000 jobs in the month. That would be below the 204,000 added in October.
The yen is taking a bit of a breather today after hitting a six-month low against the U.S. dollar yesterday. Today’s slight rise in the yen—0.57%–takes the yen to 102.37 to the dollar. Japan’s currency is down 14% for 2013 against the U.S. dollar.
And since Tokyo stocks climb as the yen falls—on expectations that a cheap yen will create more sales overseas for Japanese companies and add to revenue and earnings as strong currencies are converted into yen for hometown balance sheets—Japanese stocks moved up to just short of a six year high for the Nikkei 225 Stock Index at a December 3 close of 15,749.70. That’s the highest level for the index since December 12, 2007.
The pause for the yen—and most likely for Japanese stocks too—comes as investors and traders wait to see what the European Central Bank will do on rates at its Thursday, December 5 meeting. The central bank is most likely to stand pat rather than cut interest rates at the meeting.
Investors and traders are also waiting on U.S. jobs data due on Friday, December 6. In October the U.S. economy added 204,000 jobs and a number significantly above that report would add to fears that the Federal Reserve will move to begin tapering off its $85 billion a month in asset purchases with its December 18 meeting. Economists surveyed by Bloomberg are projecting that the U.S. economy added 181,000 jobs in November.
Right now it looks like investors and traders in Japan—and in Europe and the United States—are in a wait and see/protect the profits mode in front of the Thursday and Friday news.
It wasn’t much of a hurdle, but it looks like companies jumped it in the third quarter.
With 90% of the Standard & Poor’s 500 reporting, earnings are up 3.7% year over year for the quarter, according to FactSet. Taking into account estimated earnings at companies that haven’t yet reported, earnings are projected to show 3.5% growth in the quarter.
Going into the third quarter, companies were projected by Wall Street analysts to show 1% earnings growth. Among companies that have reported, 69% have exceeded consensus earnings estimates. That’s at the high end of the average historical range. Earnings grew by 2.6% year over year in the second quarter
Third quarter revenues are up 2.9% with 52% of companies beating analyst projections on revenue. Sales grew 1.7% year over year in the second quarter.
The end of the third quarter shifts attention to projections for the fourth quarter. Estimates now call for fourth quarter earnings growth of 7% on sales growth of 0.6%. Estimates almost always come down as earnings reporting season gets closer so I’d expect fourth quarter estimates to decline as we move through January and February and into March. Three months ago projections for the fourth quarter called for 10% earnings growth.
Projections now see earnings growth of 5% for the full 2013 year on 1.9% sales growth. If those projections were accurate 2013 would turn out to be slightly better than the 4% earnings growth in 2012.
Projections for 2014 are now looking at 11% earnings growth and 4.3% revenue growth.
If 2014 earnings come in on those projections, the S&P 500 trades at 14.8 times 2014 earnings.
The likelihood of 2014 projections being too optimistic, however, is extremely high.
The U.S. stock market ended last week in a very familiar Goldilocks mood. The surprisingly strong 2.8% GDP growth for the third quarter reported on Wednesday raised fears that the economy was so strong that the Federal Reserve would begin to taper off its $85 billion in monthly asset purchases sooner rather than later. But Thursday’s stronger than expected but still tepid report on October jobs—200,000 added in the month—raised hopes that the Goldilocks economy that has powered this year’s 26.3% rally in the Standard & Poor’s 500 would continue.
Just enough growth to keep earnings climbing but not so much to bring an end to the Fed’s cheap money stimulus.
But looking out at 2014 I have to wonder if—to mix my fairy tale metaphors—the clock is ticking on poor Goldie and we’re getting close to the moment when she has to flee the party as her carriage turns back into a pumpkin.
My worry for 2014 is that the U.S. and global economies will be too cold rather than just right and that the political pressure on central banks—including the Federal Reserve—will be too hot.
And that would mean Bye, Bye Goldilocks.
Let’s start with the argument that the world’s economies will be too cold in 2014. Read more